I was taught in law school that the law is a seamless web. In this article, I want to explore this theme to show the inter-relationship between tax abatement law and real estate transactional law.
I am going to discuss various transactions, involving (1) condominiums, (2) commercial leases, (3) real estate purchase and sale agreements, and (4) commercial loan documents in order to show their inter-relationship with tax abatement law in Massachusetts.
Chapter 59, Sections 59-65D, are the relevant sections of the Massachusetts General Laws to be reviewed before attempting to practice in this area, as well as the Rules of the Appellate Tax Board, 831 CMR 1.00, et seq.
1. In a condominium declaration of trust, I have (at the request of clients) drafted the following:
(a) Only the Declarant has the authority to file applications for abatement; or
(b) No unit owner may file an application for abatement and appeal to the ATB without the prior approval of the Board of Trustees of the Condominium.
I question whether, if tested in court, either of these provisions are enforceable under Chapter 59, Section 59.
Under Section 59 of Chapter 59, except for certain enumerated exceptions for tenants and mortgagees, only the person assessed or the administrator of his estate or trustees or executor under his will may file an application for abatement with the local assessors. I do not believe that this can be given to the Declarant once units are conveyed. Also, I do not believe that the Condominium Trustees can have the power to deny an owner the right to file an application for abatement.
A unit owner may buy a unit in a commercial condominium in which the architect has made a significant error on the plan, stating that the area was twenty percent (20%) larger than it actually was. Therefore, the real estate tax bill since 2006 has been substantially inflated. The unit owner obtained a corrected plan of the unit and recorded it with my attorney’s affidavit under Section 5B of Chapter 183. I told the unit owner that he could not recover the real estate taxes from 2006 to the present, but for fiscal 2015 and going forward he should be able to get relief.
Finally, in a condominium, each owner receives his own tax bill. Often, it makes sense for all of the unit owners to hire one (1) attorney to file for tax abatements. There is strength in numbers. In a perfect world, 100 percent of the unit owners would join together to hire an attorney to file for tax abatements even though there must be a separate appeal for each unit owner. However, it is impossible to get 100 percent of the unit owners to agree on the day of the week. Nevertheless, it is better to get as large a number of unit owners as possible to file for tax abatements.
2. Real Estate Leases for commercial property may require:
(a) The payment by the tenant of real estate tax escalation over a base fiscal year.
(b) The payment by the tenant of its percentage share of the entire real estate tax.
(c) In a single tenant building, the tenant will pay 100 percent of the real estate tax.
Under Chapter 59, Section 59: ‘a tenant of real estate paying rent therefore and under obligation to pay more than one-half (1/2) of the taxes thereon may apply for an abatement and may thereafter prosecute in his own name any application, appeal or actions provided by law for the abatement, appeal or action provided by law for the abatement or recovery of such which after the payment thereof shall be deemed for the purpose of such application, appeal or action to have been assessed to the person so paying the same.’
A transactional real estate lawyer has to be familiar with this section in order to intelligently draft the section of the lease dealing with real estate taxes.
3. A typical real estate purchase and sale agreement (the ‘P and S’) allows for a reapportionment of the real estate taxes when ‘the actual amount of said taxes becomes known.’ However, Buyers and Sellers rarely do such a reapportionment for a residential unit.
Such a reapportionment is quite common in commercial sales. More generally, for municipalities which send out quarterly bills, the reason for the reapportionment is that the first two (2) bills are preliminary bills. The actual real estate tax bill will usually be issued after the tax rate has been set. Actual bills are usually sent at the end of December and payment is due the beginning of February of the following year.
The standard P and S provides, inter alia, that:
Collected rents, mortgage interest, water Water and sewer use charges, operating expenses (if any) according to the schedule attached hereto or set forth below, and taxes for the then current fiscal year, shall be apportioned and fuel value shall be adjusted, as of the day of performance of this agreement and the net amount thereof shall be added to or deducted from, as the case may be, the purchase price payable by the BUYER at the time of delivery of the deed. Uncollected rents for the current rental period shall be apportioned if and when collected by either party.
If the amount of said taxes is not known at the time of the delivery of the deed, they shall be apportioned on the basis of the taxes assessed for the preceding fiscal year, with a reapportionment as soon as the new tax rate and valuation can be ascertained; and, if the taxes, which are to be apportioned shall thereafter be reduced by abatement, the amount of such abatement, less the reasonable cost of obtaining the same, shall be apportioned between the parties, provided that neither party shall be obligated to institute or prosecute proceedings for an abatement unless herein otherwise agreed.’
The portions crossed out above would appear in a commercial P and S but would not appear in a residential P and S.
The important point to learn is that, in my experience, such a reapportionment is almost never done in a residential transaction and almost always is done in a commercial transaction.
(4) In construction or permanent loan documents, in the event of a default, the lender will want to provide, at its election, the right to control the filing for abatements.
Under Chapter 59, Section 59:
‘The holder of a mortgage on real estate who has paid not less than one-half (1/2) of the tax thereon may during the period beginning September 20 and ending October 1 of the year to which the tax relates apply in the manner above set forth for an abatement of such tax provided the person assessed has not previously applied for abatement of such tax, and thereupon the right of the person assessed to apply shall cease and determine. The holder of a mortgage so applying for abatement may thereafter prosecute any appeal or action provided by law for the abatement or recovery of such tax in the same manner and subject to the same conditions as a person aggrieved by a tax assessed upon him.’
It is interesting that transactional attorneys will spend a great deal of time drafting the lender’s right to recover abatements. The typical clause usually states the following:
‘Abatement. The Mortgagor will notify the Mortgagee of any action which the Mortgagor intends to take with respect to the abatement of any municipal taxes or assessments and shall initiate any such abatement action at the reasonable request of the Mortgagee. The Mortgagor will advise the Mortgagee as to the status of any such action and will not compromise or settle any such action without the prior written consent of the Mortgagee, such consent not to be unreasonably withheld or delayed. The Mortgagor hereby appoints the Mortgagee as the Mortgagor’s attorney in fact to initiate, prosecute, obtain, adjust, and settle, any such abatement action and to endorse in favor of the Mortgagee any and all drafts and other instruments with respect thereto. The within appointment, being coupled with an interest, is irrevocable until this Mortgage is terminated by a discharge executed on behalf of the Mortgagee. The Mortgagee shall not be liable for any loss sustained on account of any exercise pursuant to said power unless such loss is caused by the willful misconduct and actual bad faith of the Mortgagee.’
However, lenders do not in practice exercise this right. This is an example of the importance of real estate transactional attorneys knowing the practical realities of lenders’ practice regarding applications for abatement and petitions to the Appellate Tax Board. Why spend a lot of time drafting and negotiating a paragraph which has no practical consequence in the real world?
The foregoing items are obviously not the entire list, but they show the inter-relation between tax abatements and real estate transactional documents.
The law really is a seamless web – many areas and inter-related.